It is nearly mandatory, when anyone under the age 55 is talking on the internet about planning for retirement, to say something like
“I’m not counting on any Social Security. If it is still there when I retire, then I’ll treat it as a bonus.”
This, like so many attempts at cynicism, bearishness, and pessimism may seem reasoned, prudent, and intelligent.
It is none of those things.
The fundamental problem is that if you ignore Social Security you also have to ignore Medicare but that means you will never be able to retire.
Why people ignore Social Security
The primary reason that people ignore Social Security is because they’ve heard years (or decades) of media & politicians telling them system has funding problems and needs to be reformed. “Scathing New Report Shows Just How Bankrupt Social Security Really Is” is a typical headline in the genre, where they write
And if you’re in your 30s or younger, you can not only forget about Social Security, but you can expect to pay more and more taxes to bail out a program that won’t be there for you when it comes time for you to collect.
Half of all millennials surveyed by the Pew Research Center in 2014 believe that Social Security will go bankrupt before they retire.
So it isn’t a surprise that people who are not close to retirement think they are prudent by assuming it won’t exist for them: It won’t exist and they need to plan for that reality, instead of putting their head in the sand, right?
How much would Social Security provide?
The average household in the US earns around $52,000 a year. They would receive something around $23,000 a year from Social Security. So by ignoring Social Security you need to have a portfolio that provides an extra $23,000 a year.
For that household earning $52,000 that’s the difference between needing to save $1.3 million and needing to save $725,000…
…that’s 80% more
…that’s $575,000 more.
That’s certainly do-able (at least for some people) but most things in life come with a cost. For most people, needing to save an extra $575,000 will come at the cost of pushing back their retirement many years or forgoing more current consumption.
If you throw away Social Security you also have to throw away Medicare
Social Security isn’t the only government program that makes retirement feasible.
All of those people who assume Social Security won’t be there for them continue to assume that the government will provide 100% of their health insurance as they age.
It doesn’t take a rocket scientist to realise that if you’re assuming there will be massive benefit cuts that Medicare won’t somehow be exempt. If we assume Social Security won’t be there for us, then we also need to assume that Medicare won’t be there for us.
That means we also need to plan on buying private health insurance from age 65 to age 100. How much do we need to budget for that?
You probably aren’t surprised to learn that private health insurance for a 75 year old doesn’t come cheap on the free market. It appears to cost about $30,000 a year. That’s nearly a million dollars in health insurance premiums that we need to save for.
Now our total bill is up to $1,625,000 if we want to be “prudent”. By excluding Social Security and Medicare we’ve increased the annual expenses our portfolio must support by over $50,000 a year. For someone that was making $52,000 a year previously, telling them that in retirement they may have an income somewhere between $50,000 and $100,000 doesn’t seem like very useful guidance.
No one says, “I’m planning on spending $30,000 a year on private health insurance for the rest of my life but if Medicare is still there, I’ll treat it as a bonus.”
No one says that because without Medicare, no one would be able to retire. $30,000 a year in health insurance costs is far too much for the vast majority of people.
So what should people do?
Don’t try to forecast the future of government programs. Don’t try to forecast anything.
You almost certainly aren’t expert enough to make any sensible forecasts; you’re probably just parroting back something you heard somewhere else. You don’t know enough about the many, many proposals that have been submitted. You don’t know enough about the politics required to have any of them pass.
You are almost certainly letting your political beliefs decide your investing strategy.
Assume Social Security will be there for you. Take it into account when planning. Assume Medicare will be there for you. Take it into account when planning.
If you wanted to assume slightly lower Social Security payouts and slightly higher Medigap payments as a new and on-going expense in retirement, that’s probably justifiable. But pretending that $50,000 of government programs will disappear and you’ll still be able to retire isn’t.
